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Quebec Auditor General issues a report criticizing the government’s management of the mining sector

On April 1, 2009, the Quebec Auditor General (QAG) filed a report that strongly criticized the government of Quebec’s interventions in the mining sector. It is anticipated that this report will bring legislative and administrative changes to Quebec’s mining regime, particularly with respect to the management of mine rehabilitation requirements.

In preparing the report, the QAG’s objective was to verify how the Quebec Ministry of Natural Resources and Wildlife (MNR) integrates economic, social and environmental criteria in planning government intervention in the mining sector so as to optimize long-term benefits for Quebec society. The QAG also assessed whether the control mechanisms implemented by the MNR allow for the environmental consequences of mining to be minimized such that the risk of government assuming additional financial obligations is reduced.

The report made several observations and recommendations on the following topics:

Planning Government Intervention: The QAG believes that it is essential for Quebec to have a formal mineral strategy in place to assist in properly planning long-term government intervention. In 2007, the MNR consulted stakeholders and committed to prepare a government strategy for the mining sector before the end of that year. However, a strategy has not yet been made public.

The QAG expressed concerns that the MNR may not have the capacity to consider economic, social and environmental impacts in creating a minerals strategy. These concerns are based on the fact that economic and tax analysis produced by the MNR does not establish clearly and objectively if Quebec is drawing sufficient compensation for its natural resources. The QAG points out that between 2002 and 2008, the gross value of the annual mineral production was approximately $17.1 billion and the Quebec government received $259 million in royalties, approximately 1.5% of the gross value of annual production.

The QAG recommends that the MNR analyse the economic, social and environmental costs and benefits associated with government intervention so as to improve planning by decision makers. The QAG also recommends that the MNR re-evaluate royalty rates to ensure that they are sufficient “to compensate for the exhaustion of the extracted resources”.

The MNR has responded to these recommendations by stating that it reviews royalty rates periodically in order to ensure that they are competitive with other provinces and ensure that government obtains fair compensation for the minerals that it owns. The MNR has also stated that in preparing its minerals strategy, it is conducting a detailed financial review and it will adopt legislative changes, if necessary.

Access to Information: The QAG notes that previously the MNR disclosed information on the mining industry allowing the population to appreciate its impacts and benefits. According to the QAG, the MNR no longer makes this information public nor does it encourage public participation or access to knowledge. The QAG recommends that the MNR develop tools that will allow for the collection and dissemination of information that will assist in its decision making process and to encourage public participation.

Resource Conservation: The QAG notes that one of the MNR’s responsibilities is to conserve natural resources. According to the QAG, the MNR has demonstrated little interest in resource conservation and most of its efforts are directed towards mineral extraction and the discovery of new resources as well as the consideration of environmental consequences associated with those activities. The QAG considers the MNR actions to be appropriate but incomplete from a long-term development perspective. The QAG believes that it is essential that the MNR look at complementary means of extraction in order to optimize resources for present and future generations. It recommends that a life cycle approach to metals be implemented and that recycling and reuse be considered.

The MNR has responded to these recommendations by stating that the life-cycle approach to metals is the responsibility of the Ministry of Economic Development (MED). Nevertheless, the MNR has undertaken to better coordinate its efforts with the MED.

Rehabilitation/Closure Plans: The Quebec Mining Act requires that a rehabilitation plan be filed with and approved by the MNR prior to undertaking any mining or significant exploration activities. The approved plan must be accompanied by a financial guarantee. Each rehabilitation plan must be reviewed periodically, at least every five years. The QAG audited a sample of the rehabilitation plans filed to date and noted the following:

The MNR has not developed a mechanism that will allow it to determine when mining activities commence making it is difficult to ensure that work is not conducted before the approval of a plan. As such, some mines began operations before the approval of a plan and at times, a plan was not submitted for review within the required timeline. No penalties were imposed in these circumstances.

In several files the MNR approved a plan where the Quebec Ministry of Sustainable Development Environment and Parks (MSDEP) provided an opinion that it was not conclusive, was unfavourable or specified conditions. The MSDEP’s views did not appear to be considered in approving the plan. According to the QAG, communications between the MNR and the MSDEP was not sufficiently documented to allow for an understanding as to why a plan was approved despite comments made by the MSDEP.

There were long delays before granting approval of a plan. On average, it took 3 years between the time the plan was filed and its approval. The QAG notes that delays increase the risk for government given that financial assurance is only required once the plan is approved.

The QAG has recommended that the MNR implement mechanisms that will ensure compliance with the requirements for the filing of rehabilitation plans and their periodic review. The QAG has also recommended that the process for authorizing rehabilitation plans be reinforced by implementing the following actions: (a) adequately documenting the reasons that lead to the acceptance or refusal of a plan; (b) obtaining a favourable opinion from the MSDEP before approving a plan or documenting the reasons for acting in the absence of an opinion; and (c) determining a reasonable period for the approval of a plan.

The MNR has responded to these recommendations by noting that legislation currently requires that an opinion be obtained from the MSDEP. However, there is no requirement that provides that the opinion must be favourable. The MNR has also stated that its decision to approve a plan will be adequately documented and that the MNR and the MSDEP have agreed on methods to allow it to reduce delays in the approval of rehabilitation plans. The MNR notes that it is in the process of presenting legislative changes so that financial guarantees will be required at the latest one year after the filing of a plan.

Financial Guarantee: Under the current regulatory scheme, the amount of the financial guarantee is based on 70% the estimated costs for the rehabilitation of the accumulation areas. The QAG also notes that the closure costs are only based on the accumulation areas and not on the mine site as a whole. As such, if there is a default by the proponent, the financial risk for the government is more than the 30% of the restoration costs for the accumulation areas.

The QAG notes that regulations also allow for the financial guarantee to be provided in instalments over the life of the mine. Current regulations allow for the largest proportion of the financial assurance to be paid in the period before the anticipated end of the life of the mine. For example, where a mine has an anticipated life of 15 years, 3.3% of the total costs are paid in the first 5 years, 37.1% in the second 5 year period, and 59.6% in the third. As such, if there are financial problems that exist in the first 10 years of the life of the mine, the government will hold a small proportion of the estimated closure costs and may be responsible financially for the remainder.

The QAG notes that the MNR does very little work in order follow-up on the state of reserves indicated in plans filed by the proponent. Reserve estimates are an important factor in establishing the schedule for payment of the financial assurance. The QAG criticized the MNR for relying on the notion of “resources” rather than “reserves” in order to determine the life span of a mine. According to the QAG reference to the notion of reserves is much more prudent as it is the portion that is economically exploitable whereas the notion of resource refers to the mineral that is available on the site. By using the notion of a resource, the MNR is allowing for the payment of the security over a much longer period of time.

The QAG also notes that the MNR rarely followed-up on overdue payments.

The QAG has recommended that the MNR:

re-evaluate the sufficiency of the guarantee that is presently required in order to adequately protect the government against the risk of having to support the additional rehabilitation costs;

implement control mechanisms that allow it to appreciate whether reserve estimates disclosed in the rehabilitation plans are plausible; and

improve the process of following up on guarantee payments in order to ensure compliance with regulatory requirements. The MNR also recommends that inspections be increased in order to verify compliance with regulatory requirements.

The MNR has responded to these recommendations by stating that it is considering adopting legislative and regulatory changes that will reduce the risks to government inheriting mine sites that require rehabilitation. The MNR has also undertaken to complete its review of all files to verify that reserve estimates used to establish payment schedules for the financial guarantee are appropriate.

The MNR has stated that it intends to propose legislative changes to ensure that the notion of “reserve” will not have an impact on the payment of the financial guarantee. In addition, the MNR has committed to prepare legislative changes that will allow it to accelerate the payment of financial guarantees so that they will be paid earlier in the life of a mine. The MNR also recognizes that it must put in place a systematic inspection program to determine the optimal frequency of site visits based on potential risks.

Certificate of Liberation: Quebec mining legislation allows a person to obtain a certificate from the MNR releasing it from any future mine rehabilitation obligations when: (i) restoration has been completed in compliance with an approved plan and it does not present any risk of acid drainage; or (ii) a third party undertakes to assume the rehabilitation obligations.

The QAG audit indicated that on occasion there was no analysis documenting whether the MNR requirements for mine closure were met that would justify issuing a certificate.

Where a Certificate of Liberation was issued on the basis that a third party assumed the rehabilitation obligation, the QAG is critical of the fact that the MNR did not verify the solvency of the acquiring company, which increases the risk to government.

The QAG has recommended that the MNR:

document its decision to issue a Certificate of Liberation on the basis of its own guidelines and establish whether the site is in a satisfactory condition;

ensure that it obtains a favourable opinion from the MSDEP before issuing a Certificate of Liberation or documenting the reasons for acting in the absence of such an opinion; and

verify the financial position of a purchaser in the case where environmental responsibility is transferred to a third party in order to ensure that the third party has the capacity to satisfy closure obligations.

The MNR has responded to these comments by stating that it does consider its guidelines and determines that sites are in a satisfactory condition before issuing a Certificate of Liberation. The MNR intends to properly document the issuance or non-issuance of a Certificate of Liberation and inform the MSDEP. Finally, the MNR has also undertaken to analyse and document all files with respect to the capacity of the third party to respond to obligations related to site rehabilitation.

Conclusion

The QAG report is critical of the MNR practices with respect to the management of the mining regime. Legislative and administrative changes to the Quebec mining regime, particularly with respect to the management of requirements related to mine rehabilitation are anticipated. The MNR has already committed to make such changes in response to the QAG report. We note that the MNR will make its mineral strategy public in the near future which will provide some insight into possible additional changes to the financial and environmental regime applicable to mines in Quebec.

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